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US Inflation Quick Analysis: Strong figures on all fronts cement Fed action, dollar set to bounce

  • The US reported a 7% in prices in 2021, as expected, triggering a dollar sell-off. 
  • Higher Core CPI at 5.5% supports a March rate hike from the Fed.
  • The dollar could move higher once Fed officials respond to the data.

The 40-year wait is over – inflation has hit 7%, the highest since 1982. That figure is what economists had expected, triggering a "buy the rumor, sell the fact" response. However, this headline inflation is set to cause a headache for President Joe Biden and Federal Reserve Chair Jerome Powell who has been recently renominated by the President. 

This political pressure will likely result in statements from Fed officials, about their determination to act. Several hawks have already come out in support of raising rates in March and also of an aggressive reduction to the Fed's balance sheet. It currently stands at nearly $8.8 trillion. 

However, Powell seemed calmer, focusing on a strong economy and refraining from promising imminent action. Can he stay silent after such a figure? His calm mood sent the dollar down on Tuesday and Wednesday's response to CPI is an extension of that move. 

Will the dollar continue lower? Powell will find himself under pressure to, at least, offer a tougher tone. Moreover, it is not only political pressure stemming from the headline, but also underlying prices that undermine the bank's calm.

The Core Consumer Price Index (Core CPI) hit 5.5%, above 5.4% expected. On a monthly basis, this figure that excludes volatile food and energy costs rose by 0.6%, exceeding estimates as well. The Fed focuses on core prices, and would have to respond to curb inflation. 

Overall, while the "buy the rumor, sell the fact" response makes sense in the short term, the accumulation of inflationary data such as this report and strong wage growth – 4.7% in 2021 – point to more aggressive Fed action. That would turn the dollar back up, potentially reversing recent gains. 

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Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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